A man wearing a Diego Maradona T-shirt walks past the Central Bank of Argentina on November 30, 2023 in Buenos Aires, Argentina.
Tomás Cuesta | News Getty Images | Getty Images
Argentina is in the grip of a deep economic crisis, and a veteran economist believes part of the solution is for President Javier Millay to fulfill his campaign promise to dollarize the economy and abolish the central bank.
Latin America’s third-largest economy is currently struggling to cope with the world’s fastest-rising prices, which are hammering Argentines’ purchasing power.
Data published on Tuesday by the country’s Statistical Service shown that Argentina’s twelve-month inflation to February rose to 276.2%, confirming Argentina’s position as having the worst inflation in the world.
Argentina’s government on Monday launched a massive debt-to-peso swap in a bid to help stabilize the crisis-hit economy and potentially pave the way for Milei to lift exchange controls.
Steve Hanke, a professor of applied economics at Johns Hopkins University, described the move as “a kick-start to the railroad type of operation.”
“They don’t need to buy any time, if they dollarized the economy and got rid of the central bank — which Miley promised during his campaign, it would fix things. And it’s possible to do that, and I think it’s absolutely desirable,” Hanke told CNBC’s “Squawk Box Asia” on Thursday.
Hanke said he had drafted a law in 1999 at the request of former President Carlos Menem that would have dollarized Argentina’s economy. The economist previously said he was in close contact with Milei’s technical team and described himself as an “informal advisor” on issues such as dollarization.
Argentina’s President Javier Millay speaks to lawmakers during the opening session of Argentina’s Congress for the 2024 term on March 1, 2024 in Buenos Aires, Argentina.
Tomás Cuesta | News Getty Images | Getty Images
“We wouldn’t be talking about it, and they wouldn’t have gone bankrupt again and again if they had dollarized a lot in 1999. But in any case, it looks like Milei has put the dollarization issue on the shelf, and I think Milei will be done. This is a fatal mistake,” Hanke said.
“They’re never going to get out of the soup by fooling around with this financial engineering, kicking the can down the road and trying to put in place what really is just plain vanilla IMF. [International Monetary Fund] program. These programs just don’t work [and] they have a history of not working,” he added.
A spokesman for the Argentine embassy in London was not immediately available to comment when contacted by CNBC.
“Everything is nothing without stability”
Miley, who was recently accused of hypocrisy for a salary scandal, struggled to win the necessary support from lawmakers to pass his sweeping economic bill.
The libertarian economist, who was sworn in late last year and has often been compared to former US President Donald Trump, insisted there is no alternative to the proposed “shock therapy” if the government is to solve the country’s economic woes.
Proponents of dollarizing Argentina’s economy say the change could help the country tame soaring inflation and put an end to the boom-and-bust cycle. Critics, however, say the move will strip the country of its national sovereignty and reduce Argentina’s ability to influence the economy through moves such as interest rate changes.
Ecuador and Panama are two notable examples of countries that have previously dollarized their economies, but no country the size of Argentina has previously shifted to American dollar.
“To dollarize, you don’t have to have net foreign exchange reserves that are positive,” Hanke said. “You have to have gross foreign exchange reserves that are greater than the value of peso notes and coins outstanding and I know all that. This is not a theory I’m talking about, I’m not in class. I did that in Ecuador,” he continued.
“In Ecuador, we dollarized it in 2000, 2001 and they had negative net reserves, but they had gross foreign exchange reserves greater than the notes and sucre coins they had to exchange and we did.”
Hanke said Argentina has “huge amounts” of US dollar cash because the country is already “de facto dollarized.”
Asked about the US interest in dollarizing Argentina’s economy, Hanke replied: “I think the US interest is to have a stable Argentina. A big, strong South American country that is stable. Stability may not be the everything, but everything is nothing without stability. That’s what the US should expect, and by the way you don’t have to get permission from the US government to do that.”